International Trade and Corporate Market Power

IMF Working Papers, July 17, 2020

Source details

Authors: Jesus R Gonzalez-Garcia, Yuanchen Yang
Publication date: July 17, 2020
Series: Working Paper No. 2020/131
This paper examines the effect of international trade on corporate market power in emerging market economies and developing countries, with a special focus on sub-Saharan Africa.
Analysis period: 2000-17.

Data sources described:
- Large firm-level dataset.
- Tariff data by sector.
- Aggregate indicators of international trade.
Coverage and scope:
- Emerging market economies and developing countries, with particular attention to sub-Saharan Africa.
- Empirical analysis spanning the period 2000-17.

Trade liberalization and integration:
- Greater trade liberalization and trade integration are associated with significant declines in market power.
- The effects of trade liberalization on market power materialize over time.
- There are significant complementarities between trade reforms and real sector reforms.
Sectoral and firm-level heterogeneity:
- The effect is more pronounced for firms in the manufacturing and ICT sectors.
- Private sector firms show more pronounced declines in market power.
- Firms with higher initial markups experience stronger reductions in markups.
Regional results:
- Firms in sub-Saharan Africa tend to experience significantly lower markups after allowing greater trade integration.

Trade reforms can reduce corporate market power, particularly when:
- Accompanied by real sector reforms (complementarities between reforms).
- Targeted to sectors where effects are strongest (manufacturing, ICT).
Attention to firm heterogeneity:
- Policies may have larger impacts on private firms and firms with higher initial markups.
Regional focus:
- Trade integration efforts are associated with lower markups in sub-Saharan Africa, suggesting potential gains from liberalization in the region.